Q3 2024 Dine Brands Global Inc Earnings Call
Speaker Change: Good day and thank you for standing by welcome to the Dine Brands' third quarter earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you will need to press star one one on your telephone you all didn't hear an automated message advising your hand, just raised to withdraw your question. Please press star one one again please be advised for today's conference is being recorded I would now like to hand, the conference over to your host today, Matt Lee Senior Vice President of Finance and Investor.
Speaker Change: Please go ahead.
Matt Lee: Good morning, and welcome to Dine brands Global third quarter fiscal 2024 conference call.
Matt Lee: This morning's call will include prepared remarks from John Payne, CEO and Vance Chang CFO.
Following those prepared remarks, Tony Marone, Leighow President of Applebee's, and Jay Johns President of IHOP will also be available to address questions from the investment community during the Q&A portion of the call.
Matt Lee: Please remember our safe Harbor regarding forward looking information during the call management will discuss information that is forward looking and involves known and unknown risk uncertainties and other factors, which may cause the actual results to be different than those expressed or implied.
Please evaluate the forward looking information in the context of these factors, which are detailed in today's press release and 10-Q filing.
The forward looking statements are as of today, and we assume no obligation to update or supplement these statements.
Matt Lee: We will refer to certain non-GAAP financial measures, which are described in our press release and available on Dine Brands' Investor Relations website.
Matt Lee: For calendar planning purposes, we are tentatively scheduled to release, our Q4 2024 earnings before the market opens on February 25th 2025 and to host a conference call that morning to discuss the results.
Matt Lee: That is my pleasure to turn the call over to Dine Brands' CEO John Payne.
John Payne: Good morning, everyone and thanks for joining us for our third quarter earnings call.
Matt Lee: I'll begin by discussing our plans for IHOP leadership transition as we announced in September after 16 years of dine in the last six as IHOP President Jay jobs announced his retirement Jay will step down from his role in January and will remain involved with IHOP in an advisory capacity until March of 2025.
Matt Lee: <unk> 10 years marked by IHOP strengthened market position now operating over 1800 restaurants globally and why we'll Miss his daily presence, we're tremendously grateful for his continued support during the transition period.
Matt Lee: And two weeks ago, we officially welcomed lorence, Kim and he will assume the title of IHOP President on January 6th.
Matt Lee: Lawrence joined Us from Yum brands, where he was most recently Chief Innovation Officer. Lawrence has over 20 years of senior leadership experience at leading consumer brands and he's got a proven track record in driving global brand strategy marketing and digital innovation Lawrence brings valuable experience and fresh perspective to support <unk> long term growth.
Matt Lee: And as IHOP President he'll oversee the continued expansion of the brand focusing on driving development and sales growth pioneering innovation and improving the guest experience. We're excited to have Lawrence onboard and we wish Jay all the best for his retirement.
Matt Lee: Now moving onto our results today, I will discuss <unk> Q3 results, including performance and operational updates from our three brands I'll also dig into some important consumer insights. We've learned this year and how it's informing our strategy for Q4 any of the 2025, and then I'll hand, the call over to Vance to discuss.
Matt Lee: Our financial results in greater detail.
Matt Lee: The third quarter was challenging for our brands with results falling short of our expectations industry.
Matt Lee: Industry headwinds have persisted and our operating environment continues to be highly competitive and promotional.
Matt Lee: Our consumer demographic remains under financial pressure and it's still pulling back on discretionary spending with the biggest impact coming from the lower income consumer as they're choosing to eat at home more often.
Matt Lee: There's no doubt that macro challenges continue to impact performance, but the bigger question for US is how we can be more forceful in pushing back against these headwinds and more effective at drawing guests to our brands.
Matt Lee: We know we're capable of more and while the underlying strength of our business provides assurance of resilience through market cycles. We are diligently working to identify and address the missing ingredients in our strategy to refine our offerings and move forward for the purpose of today's call I'll provide an overview of what we know today, what we know is working and where.
Matt Lee: We see opportunities to refine reorient and accelerate our strategy.
Matt Lee: We already know that today's environment demands promotions that deliver value menu variety, great food and drinks and an outstanding experience.
Matt Lee: However, there are also areas that require further refinement and a reorientation to better address evolving consumer needs at a high level. We know the following about our guest in today's changing market first guests are placing a higher value on consistency knowing what to expect at a seamless interface with the brand in every interaction.
Matt Lee: Guests are.
Matt Lee: Kris singly sticking out simplicity and a market with overwhelming choices and guests continue to trade down and some are seeking all encompassing value that extends to the entire dining experience.
Matt Lee: Despite current challenges market data tells us that our guests continue to have a strong affinity with our brands. Our brands had delivered value at scale for generation supported by a robust network of some of the most loyal and dedicated franchisees in the industry.
Matt Lee: And in fact, our opportunity now is to better capitalize on our brand equity to enhance the impact for all of our stakeholders.
Speaker Change: Now for an overview of the numbers from the quarter adjusted EBITDA increased $1.3 million to 61 9 million in Q3 compared to Q3 of 2023.
Matt Lee: Total consolidated revenues decreased $7.6 million to $195 million in Q3 2024 compared to the same period last year.
Matt Lee: Applebee's reported negative, 5.9% comp sales and IHOP reported negative 2.1% comp sales.
Matt Lee: Vance will provide more details on financial performance in a moment.
Matt Lee: And so with that I'll turn to the brand updates beginning with applebee's.
Matt Lee: Applebee's continue to face tough conditions in Q3 pair.
Matt Lee: Paired with a tough rollover of our successful all you can eat wings promotion from a year ago. This resulted in comp sales and traffic falling short of our internal expectations and.
Matt Lee: In Q3, we kicked off our partnership as the official Grill and bar the N F. L with a new AD campaign that featured current players and coaches and highlighted our 50 cent boneless wings campaign.
Matt Lee: At this early stage of our partnership we're encouraged by the strong engagement around our advertising campaign, showing the power of the brand alliance between the NFL on Applebee's.
Matt Lee: Further work is needed to leverage the potential of the partnership and drive traffic.
Matt Lee: The Applebee's NFL partnership provides a platform for us to demonstrate all encompassing value to our guests and we're making the necessary menu refinements to better package, our offering to capitalize on the potential we continue to see here and we'll provide further updates next quarter.
Matt Lee: As we do this we will build on the quarter's bright spots, including the positive impact on our off premise sales during the NFL promotion as we said before we believe there is significant opportunity to improve our off premise business extending our promotions and limited time offers to off Prem channels is an important pillar and.
Matt Lee: The bad thing that strategy.
Matt Lee: In fact, we've seen guest satisfaction metrics improved versus previous quarters, driven by enhanced off premise offerings and improved order accuracy.
Matt Lee: Working with a prominent brand like the NFL helps us provide exciting opportunities to connect and drive engagement with our guests both in person and online and I believe significant upside exists when paired with the consistency simplicity and all encompassing value. We know our guests want and our brands are capable of delivering.
Matt Lee: So looking ahead, you can expect to see a combination of immediate refinements to our offerings.
Matt Lee: For example, we launched two value initiatives in October to drive traffic on Mondays, we now have our pick six promotion, which will run through the Super Bowl and we recently introduced our new Burger Tuesday L. T O that offers a handcrafted burger with fries and a drink for just 999.
Matt Lee: Our real Big meal deal is also launching this quarter, which will include the choice of a new big entre or a fan favorite and a beverage at an attractive price point, we're applying our learnings to this with a shift to more full meal value offers and will continue to evolve our value propositions to keep our guests engaged.
Matt Lee: Now moving to IHOP.
Matt Lee: Perhaps performance was challenged as we were also lapping last year's successful double value offerings of kids eat free and all you can eat pancakes.
Matt Lee: In the Middle of June we leveraged our barbell promotion strategy to meet our guest needs and we saw some positive results from those efforts this quarter.
Matt Lee: An example of this was our all you can eat pancakes promotion, which featured a menu handout with our value priced all you can eat pancakes on that front and higher margin abundant combos on the back of this year. We once again decided to run the campaign around back to school season to help families. When schedules are tight and wallets are pinched last year was the firm.
Matt Lee: Time, we offered all you can eat pancakes in the third quarter, which was based on guest feedback and proved to be successful.
Matt Lee: In an increasingly crowded space for value, our messaging is taking a bit longer to capture the attention of guests. Despite this are all you can eat offering had a positive impact on sales in August and September with comp sales performing at or above family dining for three weeks during the promotion.
Matt Lee: On the menu innovation front IHOP unveiled its fall menu in September and launched its new anytime tacos as well as updated a variety of favorites, including IHOP breakfast burrito, which is performing well above expectations.
Matt Lee: We're promoting these new menu items as well as our combo tiers to support a balanced barbell strategy and continue to drive profitability for franchisees.
Matt Lee: And in October we launched our brand New House Faves menu with four high demand breakfast dishes available Monday through Friday for six or $7, depending on the market, giving families and expanded way to save when dining out during the week. This value platform has been in the works for over a year and it offers craver.
Matt Lee: Well menu items at attractive price points.
Matt Lee: We're pleased to see our efforts around enhancing the guest experience are having positive impact across our system over.
Matt Lee: Over the past year, we've seen improving guest satisfaction scores and guest complaints have gone down as a result, we attribute this to our improving operations and focus on efficiency in the front and back of House recently more IHOP restaurants are offering 24 hour locations, we're working with franchisees to take a disciplined approach.
Matt Lee: To reintroducing 24, seven or 24, two and making sure. The economics makes sense and there is demand for it year to date, we added 42 additional 24 hour locations, bringing the total to 860 restaurants.
Matt Lee: As we said earlier in the call. We're excited about the opportunities that lie ahead for IHOP value will remain our focus for the rest of the year and we have a strong pipeline of promotions marketing campaigns and menu innovation that will keep our guests engaged during the busy holiday season.
Matt Lee: Shifting now to Fuzzies in October we announced that Patrick Kirk was promoted to President and Chief Marketing Officer, Patrick has made an immediate impact and we're excited about the fresh perspectives and creative thinking he brings as he leads the brand's future growth.
Matt Lee: In Q3, fuzzy as comp sales and traffic were pressured but introductions of new value promotions helped improve performance towards the back half of the quarter we.
Matt Lee: We continue to get positive feedback from guests and new menu items and fuzzies expanded promotions that are leveraging the benefits of the dine platform.
Matt Lee: During the quarter Fuzzies launched its hot Honey chicken tacos, and spicy watermelon Margarita combo developed in collaboration with country Music Star Thomas threats Tequila company dose premise traffic and sales improved during the run of this limited time offer and guest feedback to this combo offering was very positive as a result, we're going to lose.
Matt Lee: Average fuzzies bar and beverage capabilities to lean more into Taco and Margarita combo platforms moving forward.
Matt Lee: Late in the third quarter fuzzy as announced a first of its kind partnership among its Dallas Fort worth franchisees to lots of regional happy hour deal. This was significant moment for the Fuzzies brand because first the Dallas Fort worth area is fuzzy its biggest market with over 50 restaurants.
Speaker Change: Second having a happy hour deal expands our day part between lunchtime and peak dinner hours, which also contributes to higher traffic and third this is another chance for us to show and expand the strength of our bar business.
Matt Lee: Looking toward the rest of the year, we have new promotions and new menu items in the pipeline as we continue to reinforce our value driven positioning it fuzzies.
Matt Lee: Now on the international side of the business, we're driving growth in both our core markets as well as strategically looking at opportunities in new markets with eight net openings year to date in.
Matt Lee: In the third quarter, we opened three dual brand locations two in existing markets, Peru, and Mexico, and one in a new market, Honduras, bringing us to 13 total dual brand restaurants, the restaurants to perform well and we continue to see this portfolio achieve on average approximately 1.5 to two times.
Matt Lee: The revenue of a single branded restaurant.
Matt Lee: We're pleased with the growth of the dual brand concept internationally and we're excited about the potential of this opportunity domestically. We've already received strong interest from existing U S franchisees on adding a second brand into their restaurants.
Matt Lee: As we mentioned last quarter, we have 15 sites targeted and continue to remain on track to open our first U S domestic location and Seguin, Texas in Q1 of 'twenty 'twenty five.
Matt Lee: Having two iconic brands in our portfolio the complement each other as a competitive advantage and we plan to leverage this to improve the economics and drive growth across our system I'll wrap up by reiterating our commitment to driving growth innovation and exceptional guest experiences I'm confident in our team's ability to navigate the evolving market.
Matt Lee: Gabe and capitalize on new opportunities and so with that we will turn the call over to Vance.
Vance Chang: Thanks, John while our topline results were challenged this quarter, we continued to generate strong free cash flow and EBITDA and remind shareholders that our asset light business model positions us well to navigate these volatile environment.
Matt Lee: On the top line consolidated total revenues decreased to $195 million in Q3 versus $202.6 million in the prior year.
Matt Lee: Primarily driven by a 6.2 million dollar decrease in franchise revenue and a $1.1 million decrease in rental revenues.
Matt Lee: Our total franchise revenues decreased three 6% to $166 $4 million compared to $172.5 million for the same quarter of 2023.
Matt Lee: Excluding advertising revenues franchise revenues decreased 2.6% to $96 $6 million compared to $99.1 million.
Matt Lee: Rental segment revenues for the third quarter of 2024 decreased compared to the same quarter of 2023, primarily due to operating lease terminations and a decrease in percentage rent.
Matt Lee: G&A expenses decreased 6.6% to $45.4 million in Q3 of 'twenty 'twenty four down from $48.6 million in the same period of last year, mostly due to lower compensation related expenses offset by an increase in depreciation expense.
Matt Lee: Adjusted EBITDA for Q3 of 'twenty 'twenty, four increased to $61.9 million from $60.6 million in Q3 of 2023.
Matt Lee: Adjusted diluted EPS for the third quarter of 2024 was a dollar and 44 cents compared to adjusted diluted EPS of a dollar and 46 cents for the same period of last year.
Matt Lee: Now turning to the statement of cash flows.
Matt Lee: We had adjusted free cash flow of $77.8 million for the first nine months of 'twenty 'twenty four compared to $54 million for the same period of last year, driven by a 21.7 million dollar decrease in capital expenditures.
Matt Lee: Cash provided.
Matt Lee: Bided by operations by the end of the third quarter of 'twenty 'twenty four was $77.7 million compared to cash provided from operations of roughly $79.3 million for the same period of 2023.
Matt Lee: The decrease was primarily due to a decline in segment profit offset by a decrease in G&A expenses and a favorable increasing working capital.
Matt Lee: Capex through Q3 of 'twenty 'twenty four it was $10.3 million compared to $32 million for the same period of 2023.
Matt Lee: The company increased spending in information technology and other projects in fiscal year 2023.
Matt Lee: We finished the third quarter with total unrestricted cash of $169.6 million compared with unrestricted cash of $153.5 million at the end of the second quarter.
Matt Lee: Additionally, we paid $7.8 million in dividends in Q3 of 'twenty 'twenty four with.
Matt Lee: We continue to remain committed to our current dividend, which has a dividend yield of nearly 7% next let me discuss applebee's performance.
Matt Lee: Q3 same restaurant sales were negative 5.9%.
Matt Lee: Average weekly sales were over $49500, including over $10700 from off premise or over 21% of total sales of which 11% is from to go and 10% is from delivery IHOP Q3 same restaurant sales were negative 2.1%.
Matt Lee: Average weekly sales, where its $37000, including $7100 from off premise or 19% of total sales of which seven percentage from to go and 12% is from delivery.
Matt Lee: On the labor front franchisees are reporting that staffing our labor costs have continued to remain steady.
Matt Lee: Turning to commodities, we're seeing cost continued to stabilize our expectations for the full year are consistent with what we said in Q2, which was low single digit inflation IHOP and low single digit deflation applebee's due to varying market baskets at the brands.
Matt Lee: As a result of these differences applebee's commodity costs this quarter fell 2.4% and IHOP commodity costs grew three 7% versus the same period of 2023.
Matt Lee: Our supply chain co op C. S. C. S continues to work across the Applebee's and IHOP systems to identify additional cost savings opportunities and support restaurant profitability initiatives through both operational improvements and input costs.
Matt Lee: To date in 'twenty, 'twenty, four which implemented projects, resulting in over $42 million of annualized savings across the system.
Speaker Change: Before turning the call back over to John for Q&A I'd like to quickly provide an update on our financial guidance for 'twenty 'twenty four.
Matt Lee: We remain committed to the guidance we provided during last quarter's earnings call with exception of G&A.
Matt Lee: Our revised G&A guidance is in the range of $195 million to $200 million, including noncash stock based compensation and depreciation of approximately $35 million.
Matt Lee: With that I'll hand, it back over to John.
John Payne: Thank you Vance, our solid financial footing, our loyal franchisees network and dedicated team members all comprise our strong foundation together will continue to build on our strengths, we will refine our strategies and we will deliver value to stakeholders I.
Matt Lee: I certainly appreciate our shareholders' support and belief in our plan and I want to thank you for joining us today.
Matt Lee: And so with that we'll turn it over to the operator and we'll be open for questions. As a reminder, in addition to Vance Jay and Tony are also with US today and are happy to answer any questions. You have so operator. Please go to the queue and open the line for the first question.
Speaker Change: Thank you.
Speaker Change: Thank you at this time, we will conduct a question and answer session.
Speaker Change: As a reminder to ask your question you will need to press Star one one on your telephone and wait for your name to be announced to the draw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from Eric Gonzales of Keybanc the floor is yours.
Eric Gonzales: Thanks, Good morning.
Speaker Change: As I reflect on what's been done to drive strong results that your largest peer it's clear that our success is tied to a heavy focus on operational improvements, including a significant investment in labor at a rethinking of the menu architecture.
Eric Gonzales: This was all contemplated before the branded side.
Speaker Change: So my question is do you think you need to make similar operational adjustments and Relatedly exactly your franchise impediments.
Eric Gonzales: And what is the appetite among your franchisees to reinvest in labor ingredient quality and perhaps stepping up on value.
Speaker Change: Okay.
Speaker Change: So we'll try to unpack.
Speaker Change: So yeah.
Speaker Change: Yeah, I'll start with our performance.
Speaker Change: And in 2021 2022 and 'twenty three.
Speaker Change: We'll be referring to in your question.
Speaker Change: It did over performance same store sales and it relative to black box in relative to its peers and clearly as you allude to traffic is.
Speaker Change: An issue for us this quarter and so far in 2024.
Speaker Change: And you know our focus and what we're seeing is that we just we need to be more consistent we can we're consistent.
Speaker Change: In operations and service and quality of food as you as you mentioned, but in particular will be more consistent with our promotions and our advertising, making sure that they perform well Maura are all the time and not has started here just as we had during the quarter.
Speaker Change: We're learning is that we've got and meet guests, where they are and the GAAP definition of an expectation of value.
Speaker Change: Over the last couple of quarters are and.
Speaker Change: We really started to focus on the total cost of the meal.
Speaker Change: Where applebee's and IHOP for that matter.
Speaker Change: We're focused on primarily.
Speaker Change: Promoting and elements of the menu or menu items.
Speaker Change: It became clear that guests want to know the total cost of a dining in a restaurant for argument's sake, the cost of your sandwich fries and drinks and so.
Speaker Change: We are very aware of that insight and have made corrections going forward and as recently as rolling out.
Speaker Change: Days last quarter.
Speaker Change: Importantly, no our brands are highly regarded.
Speaker Change: We have a high affinity for both brands and we are really focused on getting the value right, making sure that our offerings match up against with guests.
Speaker Change: And in terms of franchisees willingness to invest.
Speaker Change: Our franchisees, we believe are among the best.
Speaker Change: Janet.
Janet: And they many of them have been in this business for decades as you know on the applebee's side and have substantial portfolios. We work very closely with them on all of our plans marketing renovations operations.
Speaker Change: And we are hand in hand, together working to address the moment.
Speaker Change: We're making the investments they need to make.
Speaker Change: And I think your last point, if I hit the mall as you asked about if our if our model I think you are referring to our asset light model.
Speaker Change:
Speaker Change: Meets the time and that's been our model and our strategy for a very long time and it's one that we believe is the right model going forward.
Speaker Change: As you know we generate a lot of cash consistently we have minimal capex.
Speaker Change: And we we have less exposure to the.
Speaker Change: Afford or downward swings of the of the market.
Speaker Change: But when it does enable us to do.
Speaker Change: [noise] excuse me when it does enable us to do is we do have the cash and resources to help our franchisees when and where they need it whether that might be a renovation marketing or even taking back restaurant and so.
Speaker Change: That's our view about our model and the work we have to do going forward.
Speaker Change: But one part of this topic is is it really comes down to frequency.
Speaker Change: So if you're driving a lot of customers.
Speaker Change: The NFL partnership for 50 cent boneless wings.
Speaker Change: Are the customers coming into the promotion and are they coming back.
Speaker Change: There is an operational problem they might not come back services fallen short of expectations that you might have come back and I think what we're seeing.
Speaker Change: Or is that.
Speaker Change: They spent a lot of time fixing the operations before to drive that frequency. So I'm just wondering if youre seeing anything in the trend line around your frequency of occasion.
Speaker Change: I would tell you that there needs to be some sort of change.
Speaker Change: Are the guest satisfaction scores actually at both brands not just applebee's are both up this.
Speaker Change: This year than last quarter.
Speaker Change: And both brands have spent a significant amount of effort over the last year, focusing on operations service and quality of food. So so we don't see that as that as the issue Eric.
Speaker Change: What.
Speaker Change: Is that our marketing strategy the messages that we're sharing in the value that we're communicating.
Speaker Change: Telling us they needed to be the last couple of quarters and it's really the consistency.
Speaker Change: Yes, coming in what we're seeing is that it is a very promotion driven environment.
Speaker Change: And.
Speaker Change: There's a lot of quote noise out there for consumers to sort through when there are so many brands and so many categories offering so many promotions and deals and so we have to make sure that we are very sharp in the right promotion.
Speaker Change: Communicated the right way to drive to drive traffic and repeat traffic.
Speaker Change: Thanks, I'll pass it on.
Speaker Change: Thank you for your question.
Speaker Change: As a reminder, please limit to one question or.
Speaker Change: Our next question comes from Jeffrey Bernstein of Barclays. The floor is yours.
Speaker Change: Thanks, Hi, this is product on for Jeff Good morning, everyone.
Speaker Change: Just wanted to dig a little bit deeper into the value messaging. It seems like both brands have always had it yet.
Speaker Change: When we are struggling with the breakthrough right now John.
Speaker Change: John just what do you see as the biggest roadblocks right now what can you tweak in the near term.
Speaker Change: Beyond your promos and L. P O and just how do you tackle that whole messaging.
Speaker Change: And simplicity.
Speaker Change: Potential opportunity to revamp.
Speaker Change: A little bit.
Speaker Change: Others in your space.
Speaker Change: Okay.
Speaker Change: Yeah, Jeffrey I, just don't I don't have much to add past my last answer so I'm going to ask Jay and Tony to speak more specifically about their brands plan, but I will I will reiterate that.
Speaker Change: Our focus is on.
Speaker Change: Instancy and clearly simplicity and all encompassing value and that that does include looking looking at our menus, which Tony and Jay can address so Jay why don't you begin for for IHOP talking about the way in which you're thinking about value and your menu going forward.
Jay: Yes sure John.
Jay: I think one of the things that we strongly feel that we've improved our execution of our operations over the last year and that value piece as John said hasn't quite right. One of the things that we've always had value as you said, but sometimes it's been a lot of the limited time offer value. It's here today gone <unk>.
Speaker Change: Weeks later.
Speaker Change: The thing, we've really been messing as kind of a more stable everyday type volume that's why exactly we rolled out our new house phase program in the fourth quarter. So it doesn't show up in the third quarter results, but for Q4, we did rollout our house phase program.
Speaker Change: We are encouraged by the early results of that program. It's a weekday value program. We tested it earlier this year and launch the first of October it leans directly into our strength around breakfast and has four breakfasts full meals all priced at $6 $7 and some of the more expensive markets.
Speaker Change: Includes a pancake combo French toast combo, an omelette.
Speaker Change: Our house scramble with hash brown, so they're full meals like the gases wanting right now are at a price point, that's very competitive and we feel like this being more of a stable thing on our menu.
Speaker Change: That guests can count on will make a difference for us as we go forward. So too early for her results, but we're seeing positive signs right now we're pleased with that.
Speaker Change: Yeah. Thanks, Jason This is Tony good morning.
Tony Marone: So looking back at this year one of the key learnings for US is we know that we can no longer rely on what worked so well for us in the past right. So we're building a new what I'll call an integrated value platform, that's going to create more consistency that's going to enhance whats already working.
Speaker Change: For Applebee's and it'll help us unlock some new ideas in this this value platform is going to serve as a catalyst it should kick start a new cycle of of traffic or sales growth for the entire applebee's system youre going to see a glimpse of our new approach starting next week with our new campaign.
Speaker Change: Thanks for that I appreciate it and then I know, it's a little bit early.
Speaker Change: You're definitely not going to give guidance today, but just in terms of net unit growth.
Speaker Change: 125.
Speaker Change: At a high level are there.
Speaker Change: The closure activity largely behind us.
Speaker Change: Kind of what opportunities you see to incentivize our franchisees.
Speaker Change: Often up more units.
Speaker Change: Are you considering some alternative measures, perhaps opening some co op units yourself to kind of just.
Speaker Change: Re franchise later, but just to demonstrate the viability of these units.
Speaker Change: At a high level, how do you turn the tide in 2025.
Speaker Change: Yeah.
John Payne: Nick It's John I'll take that it really it pertains to both brands and you're correct, we're not giving guidance for 2025, yet, but a couple of things I'd like to say about about development. The first is as you all know we devoted.
John Payne: More resources earlier this year.
Speaker Change: Both recruit new franchisees to bring deals to existing franchisees and resources to assist in the speeding of the construction process for those who are building and we are seeing the beginning of the fruits of that work and the impact it's having on the on the pipeline for the brands.
John Payne: It's always worth noting that IHOP.
John Payne: Distantly opening 40, or so restaurants, a year, which is a remarkable achievement for a 66 year old brand with the large footprint that it has.
John Payne: And we're confident that that will continue.
John Payne: And applebee's as we've talked about the biggest barrier to growth for Applebee's has been the cost of building a new applebee's and the brand has made very good progress against our new prototype.
Speaker Change: I'll ask Tony to talk about in one moment.
Speaker Change: But where we're seeing a lot of success right now that we think will also fuel our growth rate next year is in the dual brand.
Speaker Change: And it's important to note on the dual branded the driver for it is not necessarily the consumer proposition, it's really the economics for our owners and our developers, it's really a b to b product in the sense that it's a complementary day parts of shared kitchen common menu cross trained staff.
Speaker Change: I mentioned in the comments there doing one five to two <unk>.
Speaker Change: The revenue, we got 13 opened internationally and we're on track to do a dozen plus next year domestically starting just outside San Antonio.
Speaker Change: And most of those restaurants in the U S. Our existing IHOP that are adding an applebee's. So that's going to be a big driver of applebee's beginning to reverse its net closure numbers. It will also help us mitigate closures to your point.
Speaker Change: Next year, because there are sometimes restaurants that are on the border, but if there if they have the ability to add a second brand. It makes the economics much more favorable it also enables developers.
John Payne: That we have in the system, who wanted to develop but their territory doesn't have any room left for them to start to add one of the other brands as well and so we see that as a big catalyst for growth in terms of our willingness to.
John Payne: In terms of our willingness to invest Jeff I'm sorry.
John Payne: Right.
John Payne: In terms of our Willie in terms of our willingness to invest.
Speaker Change: Got it.
Speaker Change: We are always we are willing to take back restaurants.
Speaker Change: When and if we do we would invest in renovating those restaurants, just as our franchisees win.
Speaker Change: Okay.
Speaker Change: Thanks, I appreciate it I'll pass it on.
Speaker Change: Thank you for your question.
Speaker Change: Yes.
Speaker Change: Our next question comes from Nick <unk> from Wedbush.
Speaker Change: Floor is yours.
Nick <unk>: Thank you.
Nick: And in April you guys had that Burger view I think that was the only month that you were positive for the year.
Nick: In terms of Applebee's do you think this sort of price certainty.
Nick: That comes with this big meal deal in Q4.
Nick: And the actual deal itself is that enough to turn the tide.
Nick: Just to stem the tide right I mean can we actually see some positive.
Nick: Comps start to materialize in Q4 or is it enough to maybe just kind of stem the tide on maybe.
Nick: Increased it slightly.
Nick: On the IHOP side are we happy with sort of what we have in Q4 or is there more to be done to again kind of reverse tightened turn positive.
Nick: I'll just leave it there thank you.
Nick: Okay. Thanks, Nick Tony.
Speaker Change: Tony why don't you address the.
Nick: The the big meal deal and what you see for the fall.
Tony Marone: Yes, so we've got a new campaign that kicks off next week and I'm not going to give.
Tony Marone: Give too much away, but there are similarities with the whole lot of Bacon Burger promotion that we had so much success with earlier this year that you alluded to I will say this is more all.
Tony Marone: All encompassing value I will say, it's a much more comprehensive campaign than the whole lot of Bacon Burger and we've adjusted our media contact or content.
Nick: Adjusted our social media strategy for this campaign. So there are high expectations across the system.
Nick: This new campaign, which kicks off a middle of next week.
Nick: And turning to respond directly to.
Nick: The next point is this isn't this is designed not to stem. The tide. This is designed to drive positive comps as we did in the last couple of years.
Speaker Change: Correct and then Tony Nasty one one other thing is is Jeffrey had asked about the Applebee's plan and I alluded to the prototype work I think it's helpful for you to explain the status of the prototype.
Speaker Change: Yes happy to John.
John Payne: The new prototype is on track.
Speaker Change: In terms of timing and in terms of targeted savings if you recall we.
Speaker Change: We had mentioned on an earlier call that our goal was to reduce the build cost by 30% and so we're well on our way to achieving that target.
Speaker Change: The new design was was assessed with consumers back in September and we received really high marks so they really love it the ops test of the new back of the house kitchen that we've designed was just completed in October and we're now in what I'll call. The the refinement and adjustment stage and the goal is to introduce the new prototype early in 2002.
Speaker Change: Five.
Speaker Change: Great and then Jay can you address next question.
Jay: Sure Hey, Nick How're you doing.
Speaker Change: I think as I just said in the last answer I gave about house phase, we think in the fourth quarter and then on into next year, that's going to be a big driver for us to get traffic going again, and having the right value that has a full meal weekday value.
Speaker Change: Get guests coming in but remember we've been pretty successful in activating our barbell strategy as well and that means not only having value. We've got some more innovation coming in the fourth quarter for the holidays I'm not going to get into exactly what that is yet obviously, but but we have innovation that's full price Oh.
Speaker Change: Along with that so again, we're trying to make sure we balance the any potential negative trade down for franchisees p&l's on going to driving traffic and not having a trade down on more expensive items to those value things, we counterbalance that with new innovation in full.
Speaker Change: Price items.
Speaker Change: Steering people towards their most favorite items and then guests can choose what they want and it's up to them if they need the value by all means we want to have the right value propositions.
Speaker Change: But if they aren't necessarily looking for value and they just want their favorite item at IHOP or when it come trying the new thing we've got that form as well. So we think we're well positioned in the fourth quarter to improve our results compared to where we've been so far this year.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you for your question.
Speaker Change: Okay.
Speaker Change: Our next question comes from Dennis Geiger from UBS the floor is yours.
Speaker Change: Yeah.
Dennis Geiger: Hey, guys. Thank you one housekeeping item and a question if I could on the housekeeping item just on value could you speak to what the value incidents was in the quarter.
Speaker Change: Relative to maybe where it's been on a percentage basis.
Speaker Change: And then the question is on the off Prem opportunity can you talk a bit about where that initiative is right now and kind of what the timeline looks like to it to where you want to be on the off premise opportunity as you've you've kind of outlined it in recent quarters.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thanks, Dennis it's Sean I'll address the first part of your question about value and then I'll ask Jay and Tony to each address their brand strategy for off Prem.
Speaker Change: So.
Speaker Change: And remember we define this as the number of tickets that were L. T OS.
Speaker Change: <unk> or our everyday value so at applebee's in the quarter, 31% of the tickets, where our <unk> our everyday value. For example, the two for 20 portion of our menu and that number was 33% the prior the prior quarter. So about the same and then for IHOP that number was 60.
Speaker Change: 10% and about 12% same time last year, so slightly up and it's a good opportunity to.
Speaker Change: To reinforce what Jay said about everyday value.
Speaker Change: And the house space programme now that's not meant to be an L. T O that comes and goes.
Speaker Change: Meant to be.
Speaker Change: Longer term proportion of the menu that we haven't had before where guests can can expect everyday value when they come into I have the same way they have the everyday value menu proportionate at applebee's at the brands and testing it and tweaking it and continue to do that but I wanted to give you that context.
Speaker Change: And so why don't we ask Jay to talk about off premise and then Tony just to follow on.
Speaker Change: Yeah, Hi, Dennis.
Speaker Change: Look I'm going to before I get an off Prem I'd just add one more thing on the one John patent was just referencing on the stats, we were up a little bit in the amount of value transactions. If you recall last quarter. When we talked about this I, even said I thought we were too low on this number. So we were successful in getting us to move a little bit on that.
Speaker Change: <unk> more value.
Speaker Change: It might still be a little too low for us, which is why we're going to this more.
Speaker Change: Extensive value program.
Speaker Change: Not an L. T O. It's more of a program to get people there to count on the value that we have so I think that's important to note. We're trying to get that up a little bit and then using a barbell strategy to balance that out as far as off premise and we've been pretty stable at 19%, we'd clearly like to get our aquaman sales improving.
Speaker Change:
Speaker Change: To move that up our staff so far this year as we look at it internally where we have.
Speaker Change: The biggest challenge has been on phone orders coming in.
Speaker Change: And while we've tried to convert as many people as possible to use our direct channels and use our website or use their mobile phones to order.
Speaker Change: The reality is there are people out there in the world, it's still like talking to a human being when they place the order and those sales have been somewhat challenged and obviously, we want operations in our restaurants to be executed exceedingly well and that's been improving so we have been rolling out a call center.
Speaker Change: Illusion for our gas.
Speaker Change: And we mentioned that heavily and taught franchisees throughout the system. What the benefits are that we're at our global conference recently immediately after our comments, we had 400 more restaurants sign up to do a call center. So that's one of our big initiatives right now to help improve the execution for those.
Speaker Change: Yes, it's still want to talk to somebody as well as just the everyday let's make sure we get the food right and execute as well as we can on that to improve execution.
Speaker Change: Yeah. Thanks, Jay so from the Applebee's perspective, some of the the improvement that John mentioned in his opening comments in our off premise business. It's attributable to the three different factors. The first one is that we know that when we make available, but historically well performing dining only promotions to the.
Speaker Change: Off premise guests that we improve our performance and you saw that in Q3 with <unk>.
Speaker Change: Three of our L T OS.
Speaker Change: We also know that the off premise guests is different right, they're younger they're a little bit more affluent than the typical dining guests. So we adjusted our marketing strategy and social.
Speaker Change: Digital content strategy, a little bit different and then finally, we improved operational efficiency right. We saw an improvement in our overall guest satisfaction scores and when you do that that tends to correlate highly with them with order intent. So a combination of all three of those things is what helped US move the needle in our off premise business and we think I'm not going to.
Speaker Change: <unk> the ceiling, but we think there's more room for further improvement.
Speaker Change: Great. Thanks.
Speaker Change: Okay.
Speaker Change: Thank you for your question.
Speaker Change: Our next question comes from the line of Brian Vaccaro from Raymond James the floor is yours.
Brian Vaccaro: Hi, Thanks, and good morning.
Brian Vaccaro: Was hoping to get a couple of questions on pricing can you help level set where pricing or average check for that matter, but either one was for each brand in the third quarter and could you also just give us an update how much each brand has taken in the recent quarter and what a reasonable expectation.
Speaker Change: Year on year pricing or check might look like for each brand and thinking about the next couple of quarters.
Speaker Change: Okay, Brian that's always pressing questions for both brands vans can tackle that.
Speaker Change: Ryan so.
Speaker Change: For Applebee's Q3, we saw the franchisees to two 7% on pricing and then for IHOP. It was 6% on pricing.
Speaker Change: Applebee's, roughly a flat P mix and IHOP had a slight negative mix for the quarter.
Speaker Change: Okay and then so I guess my second question was expectation.
Speaker Change: Yeah.
Speaker Change: Sorry, I was just going to clarify that's year on year pricing right. That's not they took in the current quarter that year on year pricing just to clarify.
Speaker Change: Yes, that's year on year pricing effective pricing versus last year.
Speaker Change: Thank you.
Speaker Change: Alright.
Speaker Change: Your other question.
Speaker Change: Your other question was expectation going forward I think applebee's has been fairly steady in terms of menu pricing increase for the franchisees. It's been it's been this way for a few quarters now in the low single digit range. So we don't expect that to change much in <unk>.
Speaker Change: IHOP side, we're also expecting menu pricing too.
Speaker Change: Increase to come down in Q4.
Speaker Change: I think I mentioned this last last quarter. The most recent pricing bump was I think the IHOP franchisees did at 3% to 5% bump height in October of 2023, So that's sort of the last bump we have to overcome so after that point, we should also be back too.
Speaker Change: That normal low single digit menu pricing hikes going forward.
Speaker Change: Okay. That's very helpful. Thanks, and if I could just follow up on franchisee health can you provide any perspective on sort of where average franchisee store margins are here in the third quarter or whatever the most recent update you might have at your fingertips or any perspective on the percent of units that might be generating.
Speaker Change: Negative store level EBITDA, just trying to think about potential closures into 'twenty five and beyond thank you.
Speaker Change: Thank you Mike.
Speaker Change: Yes, Brian.
Brian Vaccaro: We as I've mentioned before we collect our franchisees financials a quarter in the rare. So so I have what I have right now is Q2, not Q3, but on average.
Brian Vaccaro: Based on self reported franchisee financials. The restaurant four wall EBITDA dollars is holding fairly steady, but EBITDA percent is pressure and of course.
Speaker Change: As with any system, we have some franchisees that are doing better than others as a normal bell curve.
Speaker Change: We talked about the franchisees cost pressure has come down as inflation in labor come under control.
Speaker Change: But obviously, we're facing topline pressures right now, but in the meantime, right. The franchisees are as engaged as ever to work with us on.
Speaker Change: Value campaigns, while implementing the restaurant profitability initiatives I talked about in my prepared remarks is $42 million of annualized savings in the system.
Speaker Change: For the franchisees and that helps improve their P&L and offsetting.
Speaker Change: Increases elsewhere. So so it's relatively stable as the high level takeaway.
Speaker Change: And Vance.
Speaker Change: We didn't reiterate are.
Speaker Change: The development guidance for the year, which includes closures right. So so so Brian if that helps you. There is no news there because we reiterated our guidance right.
Brian Vaccaro: Yes, thanks very much.
Speaker Change: Thank you for your question.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of Jake Bartlett from tourists securities the floor is yours.
Jake Bartlett: Great. Thanks for taking the question. My first is on the just the trajectory of same store sales throughout the quarter and applebee's.
Speaker Change: When you look at it reiterated guidance same store sales guidance for the year at the low end. It does imply an acceleration in the fourth quarter I believe so.
Speaker Change: So I'm trying to understand one what was the.
Speaker Change: Cadence throughout the quarter and should that give us some confidence that things are that will improve in the fourth quarter.
Speaker Change: Thanks, Jake van <unk> to take that.
Speaker Change: Jake we what we saw in Q3 was was fairly consistent pressure across our brands throughout the quarter and actually even early into the early part of Q4, although we are starting to see some improvement in the middle of Q4.
Speaker Change: And we've baked in.
Speaker Change: The latest trends into our guidance and hence.
Speaker Change: The reason why we're reaffirming the range that we that we provided last quarter.
Jake: Okay. That's helpful. And then my other question was on.
Jake Bartlett: Jay talked about barbell strategy at IHOP, and how you know that that's been a long term focus and and fairly effective what I'm hearing in applebee's is much more of a focus on value and unless about innovation I think.
Speaker Change: So you know in the past you've talked about a very strong innovation pipeline. How do you view innovation as a driver to same store sales it seems like innovation within the fast food.
Speaker Change: Segment, and specifically has been really powerful recently, so how do you view innovation as a catalyst for improving trends at applebee's.
Speaker Change: Yes, Jake just one sentence before I turn it over to Tony to address that.
Speaker Change: If we somehow.
Speaker Change: Deemphasize innovation.
Speaker Change: Thats surely not our intent because innovation, particularly of the menu.
Speaker Change: As a crucial part of our strategy.
Speaker Change: Applebee's does have an exciting pipeline and some recently rolled out innovations that Tony would be great. If you could add some color to that.
Tony Marone: Yes, I mean look innovation remains an important part.
Speaker Change: Our strategy going forward, but.
Speaker Change: Just to take a step back.
Tony: I think at the heart of the question is sort of this relationship between innovation and value and the challenge at Applebee's. It isn't just to figure out like what is the next dollar reader, but it's to build more brand relevancy and saliency.
Speaker Change: With our guests and we're going to do that with this new platform and the <unk>.
Speaker Change: Platform will then allow you to spike it up ranking spike it up with offerings that will feel more promotional and that'll be product specific and there'll be innovative new products. We developed 14, new products that we now have in our pipeline that have gone through a very stringent testing protocol that are ready to be utilized for it but we need to be smart in how we utilize them youll see one.
Speaker Change: <unk>.
Speaker Change: Beginning next week, but it's these is these innovative products that allow you to drive additional transactions, but the key is that all of it has to be consistent it has to be integrated as part of an overall value platform.
Speaker Change: Great. That's really helpful. And then my last question is on G&A and nice to see the savings and the reduced guidance I'm. Just wondering how sustainable that is was that really incentive comp something that would just snapback in 'twenty five wondering how.
Speaker Change: The savings that you are finding a G&A now might support margins longer term.
Vance Chang: Jay This is Vance.
Vance: Truth be told that our G&A savings right now it's a combination that part of it is incentive comps and that will come back over time as performance.
Speaker Change: Groups, but they are savings true savings that we've realized from just wrapping up of the initiatives that we've.
Speaker Change: We've launched the prior few years and then also we're constantly sort of looking at.
Speaker Change: Our cost infrastructure to make sure that we can find efficiencies out of it. So so what youre seeing this quarter is over the combination of all those things.
Speaker Change: And then.
Speaker Change: The other point I would add is that as I've said before we really look at the full year G&A numbers for this year.
Speaker Change: As a sort of <unk>.
Speaker Change: General run rate number of price of course.
Speaker Change: Over time, there's going to be some inflation built into it.
Speaker Change: For the most part we're looking for reallocation of G&A buckets within our current budget to do run to support the growth going forward.
Speaker Change: Great I appreciate it thanks.
Speaker Change: Okay.
Speaker Change: Thank you for your questions.
Speaker Change: Our next question.
Speaker Change: Comes from Todd Brooks of the benchmark company.
Todd Brooks: Hey, Thanks for squeezing me in.
Todd Brooks: One question in two parts if you take the new.
Todd Brooks: Kind of methods and tools are delivering value that youre employing across both brands.
Speaker Change: I guess as we look forward to those.
Speaker Change: Average check trends in France was talking about do you expect an incremental mixed drag as we look out to the fourth quarter and then the second part of the question is as we are rolling in.
Speaker Change: New new platforms and tactics like the big meal deal.
Speaker Change: Can you remind us what we're lapping in Q4 of last year from more of the traditional value playbook and will those offers be repeated or replaced with the new approach in the fourth quarter.
Speaker Change: Okay. Thanks, Thanks, Tyler Vance address average Youre question on average check and value and then we'll go to Tony If you could just if you could answer the question about what promotions were lapping from the prior year.
Speaker Change: So so Todd Pemex, we don't provide specific guidance.
Speaker Change: Our mixed but I will say that if you look at what what's been happening. This year Applebee's P mix has been fairly flat all year round IHOP, it's been barely.
Speaker Change: It's slightly down and in terms of trade down so low single digits. So we don't see that trend too to be interrupted in Q4 that probably will continue so that's.
Speaker Change: That's what we're seeing.
Speaker Change: Yeah, Hey, Todd this is Tony in terms of Applebee's, what we're lapping over we had hired a skillet.
Speaker Change: That we're lapping over and those that promotion is being replaced with the new promotion that kicks off next week.
Speaker Change: They are not similar.
Speaker Change: A different.
Speaker Change: Strategies and targets, whether that was more of a platter.
Speaker Change: As more of a all encompassing values promotion.
Speaker Change: Okay, great. Thank you both.
Speaker Change: So all of you for your questions we have.
Speaker Change: As always.
Speaker Change: And wish you all.
Speaker Change: <unk> day, and Gerald we are adjourned. Thank you for your help.
Speaker Change: Thank you.
Speaker Change: This does now conclude our conference you are free to leave.
Speaker Change: Okay.
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